The Death Knell for CPS?

Slipping by almost unobserved at the end of 2013 was an announcement from Ofcom that the cost for the ingress leg in carrier pre-selection (CPS) terminations was to rise by 74% from 1 February this year. This is very bad news for anyone in the channel with a CPS base of customers – however there is an alternative to putting prices up as we explore with John Haw of Gamma.

On the face of it, resellers in the carrier pre-selection (CPS) market have been facing up to the prospect of managing a decline in the cost of minutes for some years as commercial pressures and moves by the UK industry regulator Ofcom relentlessly drove down the cost per minute to end users. However, a glance at end of year figures from key suppliers reveals a story that seems to defy logic for the casual observer. Revenues are generally declining for fixed line minutes so turnovers are falling, whereas profits, in the form of EBITDA, are rising or at least challenging the rules of gravity by holding their own.

There can be many reason for this, not least of which is for these suppliers to get a firm grip on operations and reduce costs. There is of course a limit to those cost savings. So could it be that suppliers are not passing on these cost reductions down the food chain and are therefore automatically gaining higher profits on the same number of minutes? Well that is entirely possible and plausible given pressures on costs elsewhere in their businesses.

So, what happens when, heavens forfend, the cost of a CPS minute actually rises? Will we continue to see those fabulous profits and the share price rises that have characterised so many firms over the last few years.

Price Problems

The problem with price rises in any business is that they are difficult to pass on. Any increase in costs that affect budgeting cause customers to pause and take stock. Something along the lines of, ‘So OK, my supplier has raised his prices, let’s have a look around and see if there is an alternative, cheaper supplier?’. If it sounds familiar it is because we all do it.

The net result is that inevitably some customers will up sticks and transfer their business elsewhere.

Well, as this issue of Comms Business Magazine starts to drop on to a desktop near you so will increased bills for CPS minutes begin to arrive at many businesses throughout the UK. The reason for this is that there has been a change in the way that costs for CPS minutes is being calculated that comes in to effect on 1 February.

In essence there are two elements that make up the fixed cost of a CPS minute; Egress and Ingress, and Ofcom has agreed a new charging structure with BT that will affect these bills.

The cost for Ingress, say passing a call from the BT network to a carrier such as Gamma, is set to rise by 74%. However, to ‘balance’ this Ofcom has agreed with BT’s proposal to reduce the Egress element of the call – in this example, the Gamma termination of the call, to almost zero for calls to UK national numbers.

At first glance this may appear reasonable however, as ever, the devil is in the detail as this Egress reduction does not apply to calls to mobiles or international numbers and for these calls the cost has not been reduced at all.

Overall that equates to a CPS cost rise of around 20% for calls from fixed line to mobile and international numbers.

The significance of this can only be understood when you factor in that 50% of the average business phone bill for calls comprises the cost of calls made to mobiles. So, by extrapolation that means overall an extra 10% increase in call costs.

That is not an insignificant sum.

Now, as well as the relentless drive towards the cheaper minute for CPS calls suppliers have also had to face competition from alternative technologies and deployment models. At the same time as costs have been falling for minutes the market has seen massive rise in the number of SIP trunks being deployed as an alternative to ISDN. Cost is not the only or main issue here. SIP trunks offer greater flexibility in terms of numbering, business continuity and speed of installation over ISDN and together with the robustness and ubiquity of fast access today they are eating up the base of ISDN at a very rapid rate.

To further encourage the adoption of SIP trunk connectivity Gamma introduced a game changing initiative last summer when we announced that call terminations to 01, 02, and 03 numbers would be free of charge to Horizon and SIP trunk customers.

To add even more impetus to the move towards Hosted IP Telephony, we will, from 1 February give customers free termination on calls to ALL mobiles. This is of course in addition to the existing free handsets, (Cisco or Polycom) and free calls to 01, 02, and 03.

For the user this will represent a substantial call cost savings over CPS and at the same time provide increased functionality from the Gamma Horizon telephony platform. This is great news for the reseller too who will now not have to pass on the increased CPS costs and risk losing customers.

The initiative we introduced last summer of free terminations and handsets saw an increase in our hosted telephony run rate from 600 to 2500 seats being added per month and we anticipate this new incentive of free mobile call terminations leading to a further doubling of that run rate.

Reseller Reaction

Gamma has been trailing this new initiative with their channel partners for some weeks and as you might expect the reactions have been extremely positive.

Comms Business Magazine spoke to Brighton based Gamma reseller The Focus Group and their Sales Director Chris Goodman told us, “2014 looks set to be a very busy and exciting year for The Focus Group. Presently we are integrating 14 new starters in to our business; this takes our headcount to more than 120 and later this year in October we celebrate ten years in business.”

Commenting on the changes to the CPS charging that begin on 1 February and the Gamma IP based initiatives Goodman said, “Clearly BT need to protect their revenue base however this could be a nail in the coffin of CPS. In 2013 BT could not seem to make up their mind about the cost for ISDN30 which led to a great deal of uncertainty in the market whilst their Retail division once again announced their yearly hike in prices – this time in the region of 6%, at a time connectivity prices were falling.

All of this is not only making SIP deployment as a replacement for ISDN more appealing it is starting to make it compelling!

Gamma has consistently had an interesting and innovative portfolio. Products and services such as their inbound, SIP trunks and Horizon platform are very good but when you deploy them in combination they are fantastic. It’s relatively easy to build a compelling case to switch to IP telephony so it is my belief that with all the free call terminations they are now offering 2014 will see a massive increase in hosted telephony and SIP trunk sales.

In 2013 we reached a point where 40% of our sales were on the Gamma hosted platform and I can see this becoming the majority in a very short space of time. The free mobile call termination is an eye-catching proposition to put to our customers and will draw in more and more users for us. Horizon has reached a point in its feature set development where it is a fantastic product and we will use the Gamma portfolio to further differentiate our offering.

The cost to business of mobile calls is still very substantial and will prove to be a significant contributing factor in making the move away from traditional to new IP based telephony deployment models an easy one for users.”

Analyst Comment

Matthew Townend of illume Consulting told us, “If this plays out as we see it this move by Ofcom on CPS costs may have a very positive impact on our growth forecasts for SIP. This could also have an effect on those service providers that are sitting on the fence without a clearly defined VoIP strategy. Over the coming weeks, as we prepare our six monthly SIP Trunk Market Report, we will be testing out this hypothesis with suppliers.”